BIG GOLD'S NEXT BIG WOE

How to pump up production with commodity on cusp of a rally

Every three to four days, Barrick Gold Corp.'s chief executive Mark Bristow sits for a COVID-19 test.

While the global health pandemic has triggered tough decisions for many executives about whether to work from home or return to the office, Bristow has maintained a rigorous schedule. In recent months, he's touched down in Papua New Guinea, the Democratic Republic of Congo, Mali, the Dominican Republic, Nevada and various other countries where the company operates mines.

Later this month he expects to stop in Canada — where the Toronto-headquartered company operates a single mine in Ontario — despite mandatory 14-day quarantine rules for jet-setters like himself.

“These flipping Canadians are still locking us down for 14 days,” he told the Financial Post this week after delivering third quarter results.But he added, “We're hustling ... how do you like those results?”

With gold selling near a record high above US$1,900 per ounce, Barrick posted a record US$1.3 billion free cash flow in the third quarter, increased its dividend and paid down hundreds of millions of dollars in debt.

Across the board, Canadian gold mining companies are reaping the benefits of a bull gold run, including a sudden wave of interest from investors who until recently had shunned or ignored the sector.

The biggest question is what happens next? Even as many analysts predict the U.S. dollar will continue to weaken and propel gold prices even higher, the gold mining sector is still just emerging from a half-decade fallow period in which investor interest was sparse. That dynamic has left the sector starved for early-stage projects, and is raising questions about it can grow.

“You've got to dig quite deep” to find new projects worthy of acquisition, Bristow said. “Buying a producing asset is not so easy because you know ... it's probably too much of a premium.”

He added, “If you can find those early prospective opportunities, and you know, you can consolidate them into a regional play, that's the thing I'm focused on right now with the team.”

Analysts, meanwhile, continue to promote the gold sector as a safe haven investment amid increasing uncertainty as demonstrated by the protracted U.S. presidential election.

Bristow predicted that the election — a “s---show” in his own words — would have little impact on the price of gold. Most likely, with Republicans in control of the U.S. Senate and Biden likely in the White House, partisan gridlock would prevent any significant policy changes, he predicted.

More important to his business, he said, is the fact that paper currencies around the world are under pressure as a result of stimulus packages and the increase in debt spending, low-interest rates and inflation.

It's a view that echoes throughout the industry.

Michael Siperco, an analyst at Toronto-based Velocity Trade Capital, wrote the U.S. Congressional Budget Office predicted the U.S. federal budget deficit would hit US$3.3 trillion in 2020, regardless of whether there is an additional stimulus package — which is predicted to range from between US$500 billion and US$3 trillion depending whether Biden wins, and what Congress negotiates and passes into law.

“It seems clear that this new era of cheap money and growing debt will continue for the foreseeable future,” Siperco wrote, adding that since 2000, gold prices have risen 800 per cent as U.S. federal debt increased 500 per cent.

After years of tepid predictions about bullion prices, gold mining CEOs are predicting that the current bull run is only an initial prelude to a longer sustained rise.

“It wouldn't surprise us if gold was to get to US$2,500 (per ounce) at all,” said Sean Boyd, chief executive of Toronto-based Agnico Eagle Mines Ltd. “As we've said, the world doesn't have to be collapsing to get to higher gold prices.”

Agnico posted US$267 million in free cash flow during the quarter and raised its dividend to US$0.35, a 1.8 per cent yield. Citigroup Global Markets analyst Alexander Hacking described the company as “the best longterm record on capital allocation in the North American gold sector.”

In Boyd's view, however, the steady upward march in gold price since it hit a low of US$1,450 per ounce in March, had been overshadowed by other events until the third quarter. The coronavirus pandemic, for example, forced many companies to shut down all or some of their mines, for weeks to months, which obscured production numbers in the second quarter.

Gold broke US$2,000 per ounce in August before slipping below US$1,900 in the past few months. But the yellow metal had its best week since July, closing at US$1,949.81 on Friday, in a post-election surge.

Boyd said historically, the number of mergers and acquisitions in the sector increases as gold prices move higher; and consolidation is necessary as there are too many gold producers “relative to the opportunity set.”

“The challenge for the mining industry is really to find opportunities to grow in a way that actually improves the business,” said Boyd. “It's a lot easier to grow if you don't actually care whether it improves the business.”

The memory of 2011, the last time gold prices hit US$1,900, remains fresh in many of the mining CEOs' minds. After hitting their peak, gold prices began a slide and settled into a range between US$1,150 and US$1,300 per ounce, at which point some gold mining projects were no longer feasible or profitable.

Many of the premiums paid in acquisitions that occurred in the period just prior to the bust looked foolish, and the gold mining industry reported US$85 billion in write-offs over the next decade. As a result, the past few years have been characterized by debt repayment and lower profits.

Now, as the industry confronts another rise in gold prices, caution is urged. Barrick's Bristow said, “Right now, the focus for me is a strong balance sheet because we've got no visibility of the runway ahead of us.”

Boyd said his company isn't interested in mergers and acquisitions because historically, it has preferred organic growth in which it explores and develops its own mines, rather than buying producing mines.

“I think the one thing with us is the consistency of the approach,” he said. “One of the challenges that the industry has had is the strategies change all the time.”

Boyd noted Agnico has paid a dividend for 37 years regardless of gold's ebbs and flows and has no plans to change strategy now.

But as gold prices remain elevated, mining plans may change, as decisions about which ore is economic to mine shift. In some underground mines, cement fill is added as the mining progresses, and certain ore needs to be taken out at that moment. Plus, processing additional ore will in some cases require capital investments to add capacity.